A recent report revealed a surprising statistic about the California housing market: nearly one out of every five homes that changed hands in 2025 didn’t actually sell. They were inherited.
According to real estate data analysis, about 18% of all property transfers in California last year — roughly 60,000 homes — occurred because the homeowner passed away and the property transferred to heirs. That’s about double the national average.
At a time when buyers across California are struggling to find available homes, this trend raises an important question: how many homes are effectively bypassing the open market entirely?
Why So Many Homes Are Being Passed Down Instead of Sold
The rise in inherited homes is tied to several factors, but two stand out in particular: tax policy and long-term home price appreciation.
Over the past several decades, California home prices have risen dramatically. Many homeowners purchased their homes in the 1980s or 1990s for a fraction of what those same homes are worth today.
If those owners decide to sell now, they could face significant capital gains taxes.
Under current federal tax law, homeowners can exclude:
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$250,000 in capital gains if filing as a single taxpayer
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$500,000 in gains if married filing jointly
These limits were established in 1997 and have never been adjusted for inflation or rising home prices.
In many parts of California, including coastal communities, a typical home can appreciate far beyond those limits. When that happens, selling the home could trigger a large tax bill.
For many homeowners, the result is what economists call a “lock-in effect.”
Rather than selling, owners simply stay in their homes longer and ultimately pass the property on to their children through inheritance.
Why Inheritance Can Be Financially Advantageous
From a tax perspective, inheriting a home often provides a major financial benefit.
When a property is inherited, its tax basis is typically “stepped up” to the market value at the time of the owner’s death. This means heirs can sell the property with little or no capital gains tax owed on the appreciation that occurred during the original owner’s lifetime.
In contrast, if the original owner sells during their lifetime, they may owe taxes on gains exceeding the $250,000 or $500,000 exclusion.
Because of this difference, many families find that holding the property until death is the most tax-efficient strategy.
While this can benefit families, it also means fewer homes enter the active housing market, limiting inventory for would-be buyers.
The Inventory Problem
California already faces a significant housing shortage. When a growing share of homes transfers through inheritance instead of traditional sales, it further reduces the number of homes available for buyers.
Less inventory typically leads to higher prices and more competition, especially in desirable coastal markets.
This dynamic has led some economists and policymakers to ask whether current tax policies are unintentionally discouraging homeowners from selling.
Policy Proposals Emerging in Washington
In response, lawmakers in Washington have begun discussing changes to the capital gains tax rules related to primary residences.
Several proposals have emerged:
One proposal would increase the capital gains exclusion limits, potentially doubling them to better reflect modern home prices.
Another piece of legislation, introduced by Scott Fitzgerald, would go even further. The proposed Middle Class Home Tax Elimination Act would eliminate capital gains taxes entirely on the sale of primary residences.
Supporters argue that reducing or eliminating the tax could encourage more homeowners to sell their homes, increasing the number of properties available for buyers and improving housing supply.
Critics, however, question whether such changes would meaningfully increase inventory or simply provide a tax benefit to longtime homeowners.
Would Changing the Tax Code Increase Housing Supply?
It’s an open question.
On one hand, lowering the tax burden could motivate some homeowners who have been reluctant to sell.
On the other hand, housing supply is influenced by many factors, including interest rates, construction levels, demographic trends, and local land use policies.
What is clear is that the way homes transfer ownership is changing, and inheritance is playing a larger role than it did in previous decades.
The Bottom Line
When nearly 20% of homes change hands through inheritance, it means a significant portion of housing inventory is effectively bypassing the traditional market.
For buyers, this contributes to the tight inventory conditions many are experiencing.
For policymakers, it raises questions about whether current tax policies are unintentionally discouraging housing turnover.
And for homeowners, it highlights how long-term tax rules can shape decisions about when — or whether — to sell.
Disclaimer: I am not a CPA or tax professional. I’m just a humble Ventura realtor sharing housing news and market trends. Always consult with a qualified tax professional regarding tax-related decisions.
